On December 28, the Internal Revenue Service issued proposed regulations (now available here) providing much-anticipated guidance with respect to the requirement under the Patient Protection and Affordable Care Act of 2010, as amended (the "Affordable Care Act") that large employers offer health plan coverage to certain employees. This employer shared responsibility requirement is often referred to as the "play or pay mandate."
Starting in 2014, under the play or pay mandate, employers with at least 50 full-time equivalent employees must offer an eligible health plan that provides minimum value on an affordable basis to employees and their dependents. An employer that fails to provide the requisite coverage will risk being assessed a penalty if any of its full-time employees (i.e., in general, employees working an average of 30 hours per week) receive subsidized coverage through a health plan exchange. If an employer fails to offer an eligible health plan and at least one full-time employee receives subsidized coverage through a health plan exchange, the annual penalty is $2,000 per full-time employee (less 30 employees). If an employer offers an eligible health plan, but at least one full-time employee receives subsidized coverage through a health plan exchange because the employer's plan does not provide minimum value or is not affordable, the annual penalty is the lesser of (i) $2,000 per full-time employee (less 30 employees) or (ii) $3,000 per full-time employee receiving subsidized coverage through a health plan exchange.
The Affordable Care Act left many unanswered questions that the proposed regulations now resolve. Below is a summary of several highlights of the proposed regulations.
Related Employers: Under the Internal Revenue Code (the "Code"), related employers are aggregated for purposes of many rules pertaining to employee benefits. The Affordable Care Act provides that the Code's employer aggregation rules apply for purposes of determining whether an employer has at least 50 full-time equivalent employees. However, the statute does not address employer aggregation for purposes of determining whether an employer is assessed a penalty for not offering the requisite coverage or determining the amount of a penalty. The proposed regulations provide that the employer aggregation rules do not apply for these purposes (except with respect to allocation of the 30-employee reduction in the penalty formula as the reduction is allocated among all related employers). For example, if a parent corporation has 40 full-time equivalent employees and its wholly-owned subsidiary corporation has 40 full-time equivalent employees, both entities will be subject to the play or pay mandate since the entities on a combined basis have at least 50 full-time equivalent employees. However, if the parent provides the requisite coverage and the subsidiary does not, the parent will not be subject to a penalty and the penalty assessed on the subsidiary will be calculated by counting only the subsidiary's employees (less 15 employees, i.e., the subsidiary's share of the 30-employee reduction).
Determining Full-Time Employees: The Affordable Care Act technically requires an employer to determine whether an individual is a full-time employee for purposes of the play or pay penalty on a month-by-month basis in real time. Recognizing the administrative burden on employers in making such a month-to-month determination, the IRS previously issued related guidance, which provided for "safe harbors" for both on-going employees and new employees that allow employers to measure employees' hours over one period (called the "measurement period") and then lock in their full-time/part-time status for purposes of the penalty based on their hours in the measurement period for a subsequent period (called the "stability period"). The proposed regulations generally incorporate the provisions of the IRS' earlier guidance. To take advantage of the safe harbors, employers will need to begin recordkeeping efforts in 2013.
Hours of Service Framework: The hours of service framework used by the Affordable Care Act and the IRS' earlier guidance presents challenges for a wide variety of employers with salaried employees or employees whose compensation is not based primarily on hours (e.g., commissioned salespeople, adjunct faculty members compensated on a per course credit basis) or whose active work hours may be subject to safety-related regulatory limits (e.g., airline pilots). The proposed regulations provide equivalency rules to help determine full-time status of such employees. The equivalency rules are based on Department of Labor equivalency rules used in other benefits contexts. However, in the preamble to the proposed regulations, the IRS noted that it is continuing to consider how to best determine full-time status of such employees. Until further guidance is issued, employers of such employees must use a "reasonable method for crediting hours of service that is consistent with the purposes of [the play or pay mandate]."
Dependent Coverage: To avoid the play or pay penalty, an employer must offer the requisite coverage to full-time employees and their dependents. The Affordable Care Act does not define "dependents" for this purpose. The proposed regulations define "dependent" for this purpose as an employee's child (i.e., son, daughter, stepson, stepdaughter, or eligible foster child) who is under age 26. Significantly, the term "dependent" does not include an employee's spouse. In addition, the proposed regulations provide transition relief for employers that do not currently offer dependent coverage under their health plans. Specifically, a penalty will not be assessed on such an employer solely for its failure to offer dependent coverage in 2014 so long as the employer takes steps during its plan year that begins in 2014 toward offering dependent coverage.
Substantial Compliance: Under the literal reading of the Affordable Care Act, the play or pay penalty could be triggered if an employer fails to offer the requisite coverage to just one full-time employee, even if the employer acted in good faith and the failure was inadvertent. Recognizing the possibility of inadvertent failures, the proposed regulations provide that a penalty will not be assessed so long as an employer provides the requisite coverage to all but 5% of its full-time employees (or, if greater, five of its full-time employees).
Anti-Abuse Rule: In the preamble to the proposed regulations, the IRS notes that it is anticipated that the final regulations will contain an anti-abuse rule to address practices that employers may use to avoid the application of the play or pay mandate. For example, the preamble describes an arrangement whereby a company uses a temporary staffing agency to employ the company’s employees for part of each week resulting in neither the company nor the staffing agency appearing to employ the employees on a full-time basis.
Transition Relief for Fiscal Year Plans: Under the Affordable Care Act, the play or pay mandate goes into effect on January 1, 2014. Recognizing that this can create challenges for non-calendar year health plans because the terms and conditions of coverage are difficult to change in the middle of a plan year, the proposed regulations provide transition relief for such plans. In addition, the proposed regulations provide transition relief that would allow Section 125/cafeteria plan election changes mid-year to allow employees to obtain health plan coverage in connection with the individual mandate that also goes into effect on January 1, 2014. A Section 125/cafeteria plan must be amended to take advantage of the transition relief with respect to mid-year elections.
Reliance on Proposed Regulations: Employers may rely on the proposed regulations until the IRS issues final regulations. The IRS may change the rules in the final regulations, but the preamble to the proposed regulations assures that employers will be provided with sufficient time to come into compliance with the final regulations.
The rules implementing the play or pay mandate are complicated and the penalties for failing to comply can be significant. Employers should begin planning now to ensure compliance starting in 2014. The Employee Benefits Practice at Bass, Berry & Sims PLC will be hosting a series of webinars on the Affordable Care Act. The first webinar will be on January 17, 2013 at 12 PM CST and will focus on the play or pay mandate. During the webinar, the firm's employee benefits attorneys will provide listeners with a summary of the play or pay mandate and an action plan that employers can use to comply with the mandate, including what employers should be doing in 2013 to prepare for the mandate. Stay tuned for additional details regarding the Affordable Care Act series of webinars.